Stalin-Mao Roles Reverse as Putin Courts China Investment

China, which relied on Soviet aid during the era of Joseph Stalin and Mao Zedong, has turned the tables as Russian President Vladimir Putin visits Shanghai.

The Russian leader starts a two-day visit to China today, seeking to complete an agreement on natural gas supplies to the world’s second-largest economy, held up for more than a decade because of a debate over the price. The contract is “nearly finalized,” Putin told Chinese media in an interview published yesterday.

Putin is looking to cement ties with China as the conflict in Ukraine alienates him from the U.S. and its European allies. The relationship with China, Russia’s biggest trading partner after the two-way volume surged sevenfold in the past decade to $94 billion last year, is becoming even more important as escalating sanctions threaten to tip the economy into recession.

“As Russia’s relations with the West deteriorate, its ties with China will need to grow stronger,” Dmitri Trenin, director of the Carnegie Moscow Center, said by e-mail. “Beijing, rather than Moscow, will be the senior power.”

That role reversal is underscored by the disparity of the two countries’ economic development during the past 35 years. In 1979, as Deng Xiaoping started an economic overhaul, China’s output was 40 percent of the Soviet Russian Republic’s -- the present-day Russian Federation, according to a study published this year by the Center for European Reform. By 2010, China’s economy had become four times the size of Russia’s, it said.

Tumultuous History

Russia’s eagerness to do business with China marks yet another turn in the tumultuous history of the relationship between the countries that were once the leading powers of the communist camp. While Mao followed Stalin’s lead, the two sides fell out after the Soviet dictator’s death and even fought a border war in 1969.

The lack of trust between the two sides remained as their ideological paths diverged, until a rapprochement began in the 1990s under late Russian President Boris Yeltsin. Russia is touting the Putin visit to China as a chance to cement the relationship.

Russia and China, two of the five veto-holding nuclear powers in the United Nations Security Council, already cooperate on the world stage, often joining forces to counter what they see as U.S. dominance.

They “need each other more than usual” as China is also embroiled in international debates including the conflict over disputed waters of the South China Sea, said Li Lifan, deputy director at the Center of Russia and Central Asia Studies at the Shanghai Academy of Social Sciences.

‘Bargaining Chip’

“Both sides want to use this relationship as a bargaining chip in their relationship with the U.S.,” said Jian Zhang, a senior lecturer at the Canberra-based Australian Defence Force Academy of the University of New South Wales. “Under the surface, there is still considerable distrust and conflicting interests.”

As a sign of solidarity, Chinese President Xi Jinping was the guest of honor at the Sochi Winter Olympics in February, while U.S. President Barack Obama and most European leaders including German Chancellor Angela Merkel stayed away.

In the escalating standoff over Ukraine, though, China hasn’t taken sides decisively. In March, it abstained in a Security Council vote on a resolution condemning a referendum to endorse the secession of Crimea.

“Diplomacy requires timing and it’s good timing now for China and Russia to be closer,” said Li at the Shanghai Academy of Social Sciences. “Words like alliance or coalition are still excluded from official documents. China and Russia are talking about closer bilateral relations, but not a new group.”

Gas Focus

Putin and Xi may leave the sparring over geopolitics aside during their first meeting today, which will focus on the gas contract.

The Russian delegation, which includes the heads of OAO Gazprom and OAO Rosneft, the state gas and oil companies, wants to sign a 30-year contract to supply 38 billion cubic meters of gas a year, or 20 percent of its sales to Europe and pave the way for building its first gas pipeline to China.

Russia already opened an oil pipeline to China in 2011 and the government in Moscow also wants to close a deal to supply 100 million metric tons of crude during 10 years. Russian Prime Minister Dmitry Medvedev valued the potential supplies at $85 billion. Gazprom may agree to ship 1.14 trillion cubic meters of gas to China over 30 years for about $350 per 1,000 cubic meters, the newspaper Izvestia reported yesterday, citing unidentified people.

‘New Level’

“Russian-Chinese ties have risen to a new level of full-scale partnership and strategic cooperation,” Foreign Ministry spokesman Alexander Lukashevich told reporters in Moscow May 15, describing energy ties as the “engine” of growing economic interdependence.

The gas talks that started in 2004 are still being held up by the lack of an agreement on the price, Chinese Deputy Foreign Minister Cheng Guoping said at a briefing in Beijing May 15. To finance a $22 billion pipeline from Siberia to China, Russia sought to match the rates it got for its gas in Europe, a level China hasn’t been willing to pay.

With escalating tension threatening to hurt Russia’s ability to sell the fuel westward, Putin is now under pressure to compromise, said Vladimir Portyakov, deputy director of the Russian Academy of Sciences’ Institute of Far Eastern Studies.

“The situation suggests that the gas contract should be signed now, even at a lower price,” Portyakov said by phone. “It’s not about the company’s profit now, but about more important things. If Russia doesn’t sign it now, it will be a blow.”

Arms Trade

Russia’s role in Chinese trade has been limited by its reluctance to sell top-of-the-range weaponry to its neighbor. The government in Moscow has avoided such deals because it still views the country as a potential threat and is concerned about the Chinese using the technology for their own defense production, according to Vasily Kashin, a researcher at the Center of Analysis of Strategies and Technologies in Moscow.

In its current squeeze, Russia may be forced to reconsider that policy as well, he said.

“With our political dependence on China having increased significantly, we have to upgrade our cooperation,” Kashin said by phone.

Russia, whose resource-rich and sparsely-populated far east borders the country of 1.3 billion, has no choice but to cosy up to China, according to Portyakov at the Academy of Sciences.

“Until recently, Russia was showing that it’s not ready to get closer to China -- there was a strong pro-Western elite lobbying against that,” Portyakov said. “But now they got their hands and brains slapped.”

Before it's here, it's on the Bloomberg Terminal.